IF YOU’RE at the age where retirement is in arm’s length, you need to start focusing on building your wealth, so when you do quit working, you can do so in comfort.
Investing in property is a great way to build a nest egg for retirement, so this asset class should be on your ‘must have’ list.
Property is generally a long-term proposition, with the old adage of ‘time in the market’ being key, and on this logic, the sooner you get into the market the better.
If you buy when you’re young you’ve got plenty of time to adopt a buy and hold strategy and wait for growth, which is bound to come over many decades.
But if you have left investing until later in life – say, in your 40s, 50s or 60s – for one reason or another, there’s still time. In fact, since people are now living and working longer, there’s never been more time.
So don’t hang your head and think it’s too late to use property to build your nest egg, because it’s not, as long as you’ve got the ability to borrow and service loans.
If you’re investing at an older age, particularly for the first time, you’ll need to adopt a slightly different strategy than those buying in their 20s and 30s.
This applies firstly to obtaining finance. On face value, banks may consider older borrowers to be a greater risk due to the longevity of their working life – that is, they’ve got less working years less than younger generations.
But these same borrowers have a few advantages too. They often have a better income and are also likely to have greater equity with which to leverage. This is particularly the case as many will own their own home and have paid it down substantially, it not altogether, not to mention benefitting from huge price growth in cities such as Sydney and Melbourne in recent years.
To convince lenders you are a safe bet as an older borrower, you can use the equity in your home to provide a greater deposit for an investment property, or you can even reduce the usual 30-year loan term for the investment. It’s also important to have an exit strategy, so you can explain to the lender what you intend to do with the property in the future – ie. sell it or pay the loan out.
In your 40s you’ll have plenty of working years left, and while this is starting to reduce in your 50s, you’ll have many income-producing years remaining until retirement age – and more if you choose – which banks are also becoming increasingly aware of, which helps to prove serviceability.
Thinking more creatively
While younger people have the luxury of buying an investment property and just waiting for growth over time, investors in an older age bracket will need to be a little more strategic.
First of all they’ll need to target properties with strong growth potential, in terms of both location and the property itself. If you pick the right area and see it through at least one property cycle there’s a good chance it will double in value. These properties are likely to be negatively geared at the beginning, so you’ll need to have the cash flow to be able to sustain the investment for at least a few years.
It’s also a good idea to be proactive and consider manufacturing growth to speed up the results, by renovating or developing for instance. These can be risky activities though, so it’s essential to become educated on how and what to do before actually doing anything, or else you could lose much more than you gain.
It can also be advantageous to grow your portfolio fairly rapidly. When you hit your 50s you’ve often reached your peak earning capacity, as well as likely having plenty of equity to leverage off, which means you can borrow more – especially for tenanted investments with income – to buy several properties in quick succession, and give them all plenty of time to grow. This can be risky too, so careful consideration is required, but the pay off can be substantial. Leveraging equity is a powerful tool is growing your wealth and can substantially improve your financial results, resulting in a much bigger nest egg with which to enjoy retirement.
Lower your risk
Older investors need to take risks in some ways, but in others it’s necessary to be very cautious, as you don’t have time on your side. If you lose money you don’t have time to make it back.
To avoid making costly mistakes you’ll need professional advice and guidance in every facet of investing.
Selecting the right growth property will be absolutely crucial, as a lemon will completely derail – and potentially destroy – your retirement plan. This is where a professional buyers’ agent comes in.
But you’ll also need advice with finance, ownership structures and taxation, and experts can help you devise the right plan and strategy to ensure you are on the right track to building your nest egg.
Bear in mind that many older investors choose to buy through a self-managed super fund, especially having amassed a large enough balance to do so, but this will also require significant research and advice to ensure you meet the rules and regulations and are up to date with the latest changes.